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Speaking of PMI
Old 03-18-2008, 07:24 PM   #1
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Speaking of PMI

Another post about buying a home and how much of a ripoff PMI is made me think.

Where is all this PMI when you need it. Shouldn't the billions of dollars spent in PMI be preventing this (so called) mortgage crisis right now?

Which makes me think of the first house I bought and about how I told the mortgage lender "oh, I don't need PMI, my job is very secure, that's one insurance that I really don't need." I'm very surprised, looking back now that she didn't laugh at me. But REALLY - why would you in the real word, buy insurance that protects someone else. The insurance that you buy should be in case YOU have to default on the loan, and should protect the person who pays it. I guess though, that if it did, people would be more prone to defaulting and letting insurance cover it.

But still - I don't see how all of the money paid into PMI by so many people over so many years, hasn't protected banks during this small(ish) "crisis."
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Old 03-18-2008, 07:49 PM   #2
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Weren't a lot of these trick mortgages 2 separate loans combined? One a mortgage for 80% (no PMI) and one a Home Equity Loan not requiring PMI?
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Old 03-18-2008, 07:51 PM   #3
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Oh, that's right. That was part of the purpose I guess, to eliminate PMI. Wow, that makes it even more obvious that the banks need to suffer for their stupid lending practices.
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Old 03-18-2008, 07:51 PM   #4
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Many of the borrowers got around PMI with 80/10/10s and 80/15/5s or even 80/20/0s. The second mortgage lenders (or those who bought the CMOs from the seconds) must have taken it in the shorts in some markets.

I would think PMI would kick in on foreclosures where the owners walked away or couldn't pay, but maybe there's something I don't know...
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Old 03-19-2008, 07:49 AM   #5
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Two thoughts:

1) Yes, piggyback seconds cut PMI out of the loop in a lot of transactions

2) Even so, most of the mortgage insurers wrote enough business that they are now paying out quite a lot of cash. Go look at the sorry state of TGIC, PMI, MTG, RDN, etc.

Now that piggyback seconds are pretty much a thing of the past, your only real alternative is PMI if you want to buy or refi with less than 20% down. Fortunately (?), Congress has eased the pain a bit by making PMI deductible for those making under $100k. Not surprisingly, all of the surviving mortgage insurers have all the business they can handle (and then some), so they are raising prices and reducing the risk they are willing to take on. I personally think that the mortgage insurers are now set up to be fat cats for the next decade, although you'd have to be confident that you could pick teh ones that will definately survive.
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Old 03-19-2008, 08:25 AM   #6
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I personally think that the mortgage insurers are now set up to be fat cats for the next decade, although you'd have to be confident that you could pick teh ones that will definately survive.
I agree. It reminds me quite a lot of the property/casualty insurance industry after Katrina. Suddenly the strong players had more pricing power than ever, so it seemed, and were cautious about were writing new business -- demanding a strong "risk premium" to write it. And when nature settled down and no repeats of a supercat event occurred domestically in 2006 or 2007, they made money hand over fist.
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Old 03-19-2008, 08:56 AM   #7
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Many of the borrowers got around PMI with 80/10/10s and 80/15/5s or even 80/20/0s. The second mortgage lenders (or those who bought the CMOs from the seconds) must have taken it in the shorts in some markets.

I would think PMI would kick in on foreclosures where the owners walked away or couldn't pay, but maybe there's something I don't know...
I see the point of people avoiding PMI. But then again, the lender "supposedly" secured the possibility of the foreclosure by increasing the rates on the secondary (or third) mortgages, did they not?
Or did I miss something along the way?
If a lender decided to lend someone money for 10 times their household income, they are the biggest fools ever (and should rightfully pay the price). I personally didn't like the idea of originally getting a mortgage that was 2.5 times my household income, even though I could have been approved for up to 4 times my income at the time.
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Old 03-19-2008, 09:57 AM   #8
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I agree. It reminds me quite a lot of the property/casualty insurance industry after Katrina. Suddenly the strong players had more pricing power than ever, so it seemed, and were cautious about were writing new business -- demanding a strong "risk premium" to write it. And when nature settled down and no repeats of a supercat event occurred domestically in 2006 or 2007, they made money hand over fist.

And they still are. They still not writing homeowners' insurance policies down here (to the best of my knowledge, according to the news media). This has hampered the real estate market, since buyers need to buy the state-sponsored insurance at twice the price. I couldn't even get umbrella insurance last month due to Katrina (according to my Allstate agent), even though I have credit scores in the 800's and have made no claims after Katrina or ever. Allstate and some other insurers also cancelled wind and hail coverage on existing policies that had been held less than 3 years. I believe they also cancelled policies for those with more than two claims in five years. Of course, they made gargantuan profits every single year, even right during and after Katrina.

Pardon me if I seem a little anti-insurance; it is difficult to live down here and speak about insurance in a totally objective way. I will be so glad to ER someplace where insurance is available and responsive.


Edited to add: I should never have started talking about the situation in New Orleans. Normally I don't, but I goofed. Call it PTSD if you want, or just a weak personality, but it is much too difficult for me to discuss and I am just not up to it. Sorry.
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Old 03-19-2008, 10:03 AM   #9
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I never really thought of an 80/10 as "getting around" PMI. The interest rate on the 10% loan is higher, to reflect the higher risk to the lender, so when I was running numbers things looked pretty much like a wash, especially with PMI being deductible.

But I still like the idea of an 80/10 because it's more of a sure thing: you know if you focus on paying off the 10% loan, you'll eliminate that extra risk cost at some point, and without any hassle of having the home reappraised.

Anyway, I don't think they're a thing of the past, at least for borrowers with good credit.
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Old 03-19-2008, 10:06 AM   #10
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Anyway, I don't think they're a thing of the past, at least for borrowers with good credit.
I think it also depends on the market. I suspect that lending anything above 80% LTV is very dicey in areas where the bubble is deflating. But in areas where prices rose more slowly and are still relatively stable, I would think someone with top-tier credit could pull it off somewhere. Last time I checked, here in central Texas, prices were still flat to slightly rising. We never participated in the bubble, and here in the Hill Country we remain a very popular retirement destination for people fleeing the Houston and DFW areas.
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Old 03-19-2008, 10:31 AM   #11
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But in areas where prices rose more slowly and are still relatively stable, I would think someone with top-tier credit could pull it off somewhere.
Definitely. I'm in the process of looking into it myself and there has been no problem so far. I guess at times like these it pays to have good credit history.
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Old 03-19-2008, 12:48 PM   #12
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And they still are. They still not writing homeowners' insurance policies down here (to the best of my knowledge, according to the news media). This has hampered the real estate market, since buyers need to buy the state-sponsored insurance at twice the price. I couldn't even get umbrella insurance last month due to Katrina (according to my Allstate agent), even though I have credit scores in the 800's and have made no claims after Katrina or ever. Allstate and some other insurers also cancelled wind and hail coverage on existing policies that had been held less than 3 years. I believe they also cancelled policies for those with more than two claims in five years. Of course, they made gargantuan profits every single year, even right during and after Katrina.

Pardon me if I seem a little anti-insurance; it is difficult to live down here and speak about insurance in a totally objective way. I will be so glad to ER someplace where insurance is available and responsive.
Preface: I agree with a lot of Want2Retire's thoughts on this board, and appreciate learning from someone who probably has more knowledge than I do.

2 questions (not intended to be inflamatory in any way, but food for thought on the subject):
1) Is Allstate a publicly traded company?
2) Is it a publicly traded companies objective to maximize it's profits for both it's shareholders and it's employees?

My personal thoughts if I were an insurer:
1) If I were publicly traded and trying to maximize profits for investors, I would most assuredly raise rates so that the company would increase profts.
2) Likewise, if areas were underperforming because a given area was "Hurricane alley", or "located below the water level in the area", I would either high-tail it out of there, or raise rates to make it perform better.
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Old 03-19-2008, 01:05 PM   #13
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Preface: I agree with a lot of Want2Retire's thoughts on this board, and appreciate learning from someone who probably has more knowledge than I do.

2 questions (not intended to be inflamatory in any way, but food for thought on the subject):
1) Is Allstate a publicly traded company?
2) Is it a publicly traded companies objective to maximize it's profits for both it's shareholders and it's employees?

My personal thoughts if I were an insurer:
1) If I were publicly traded and trying to maximize profits for investors, I would most assuredly raise rates so that the company would increase profts.
2) Likewise, if areas were underperforming because a given area was "Hurricane alley", or "located below the water level in the area", I would either high-tail it out of there, or raise rates to make it perform better.
Acttually, the primary insurers like Allstate have generally not made money off the rise in homeowners insurance premiums. Actually, it has been costly and a ton of aggravation for them (imagine arguing with Florida's insurance commissioner so much that they suspend your license to write insurance in the state).

The real beneficiaries of the price spike have been the catatstrophe reinsurers, who should much of the risk. Considering how they were decimated by the 2005 hurricanes, I don't think it is unreasonable to ofer them a significant return for the considerable risk they take.
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Old 03-19-2008, 01:51 PM   #14
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I'm sorry. This is just too sore of a topic for me to engage in and remain normal, human, and civil. I should never have started talking about it! I can't do this. My sincere apologies.

Continue as before....
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Old 03-19-2008, 04:27 PM   #15
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Hun you are allowed an insurance rant, I am sure dealing with insurance companies after Katrina was almost as bad as the storm. I avoid insurance whenever possible.

Although, I am partially to one insurance company Berkshire, my share of Katrina's losses was several thousand, although I did recover a lot of that when Berkshire Reinsurance jacked up the rates the next few years.
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Old 03-19-2008, 05:17 PM   #16
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If W2R won't answer I will. Most insurance companies still won't write new policies, because, you guessed it Katrina. What they fail to mention is they don't protect against wind or hail in Mississippi, so even if another Katrina hit they would lose exactly nothing, so there is no risk to them. The closest analogy I can come up with is you are not able to obtain car insurance because you have cancer. The insurance companies won't cover you because you might have a loss they don't cover. It makes no sense, and really irks me. The few companies that are still writing policies are charging an arm and a leg, blaming Katrina, and still aren't providing coverage for wind or hail. They make it seem like they haven't made any money at all in the last 30 some odd years since hurricane Camille.
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Old 03-20-2008, 10:10 AM   #17
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Quite a catch-22 - frankly, insurance is such a racket at times - the sad part is that many times they've lobbied the government to make it 'mandatory' so they have a captive 'audience' but then they play games with the terms. I always try to remember insurance is about paying someone else to assume your risk -that's why many rich people 'self-insure.' Insurance companies also pay actuaries quite a bit of money to ensure they price the policies right.

I remember sitting in a meeting about how to maintain imaging tubes - these things are expensive - $100K's to replace and are considered catastophic failures. We had a company who wanted us to give them a yearly fee to maintain the tube and with that yearly fee, they would also take care of any catastophic costs - although we were still responsible for preventive maintenance - essentially they wanted our money to invest and then yup, they paid another insurance company for a policy to cover that catastrophic loss - so they were shifting the 'risk' to another insurance company. I learned a lot that day about how it all works. I wondered how the guy at the bottom of this catastrophic pile would handle it all - as I thought that first catastrophic insurance company probably had their own policy for catastrophic loss - 'pass the buck' or hot potato.....
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